China’s new reality is fraught with dangers

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XI JINPING IS lead a campaign to purge China of capitalist excesses. The Chinese president sees the increase in debt as the poisonous fruit of financial speculation and the billionaires as a parody of Marxism. Companies must take into account state directives. The party must permeate all areas of national life. Xi’s ability to impose his new reality will shape China’s future, as well as the ideological battle between democracy and dictatorship.

His campaign is remarkable for its scope and ambition. It started to rumble in 2020, when officials blocked the initial public offering of Ant Group, a subsidiary of tech giant Alibaba. It is thundering forward, having so far destroyed perhaps $ 2 billion in wealth. Didi, a rideshare company, was punished for listing its shares in America. Evergrande, an indebted real estate developer, is in the process of defaulting. Trading on cryptocurrency exchanges has been banned because, more or less, there is for-profit tutoring. Play is bad for children, so it should be strictly rationed. China needs large families, so abortion must become rarer. Male models should be manly and celebrities should be patriotic. At the root of it all is the thought of Xi Jinping, which is drummed into the skulls of six-year-olds.

This adds to an already brutal authoritarianism. As president, Xi purged rivals and locked up more than a million Uyghurs. He controls debate and will not tolerate dissent. The latest campaign will show whether he is an ideologue determined to seize power, even as growth slows and people suffer, or whether he is a strong man willing to temper dogma with pragmatism. His vision, in which party control ensures that business is aligned with the state and that citizens conscientiously serve the nation, will determine the fate of 1.4 billion people.

Xi is tackling real issues – indeed, many of them have parallels with the West. One is inequality. The slogan of the moment is “common prosperity”, reflecting how communist China remains as unequal as some capitalist countries. The richest 20% of households in China appropriate more than 45% of the country’s disposable income; the richest 1% own more than 30% of household wealth (see Free Trade). Another concern is the weight of tech giants accused of unfair competition, corporate corruption and unrestricted access to personal data (only the state has this privilege). A third is strategic vulnerability, in particular the threat that adversaries impede access to commodities and critical technologies.

Yet Mr. Xi’s campaign poses a threat to the Chinese economy. The pain caused by the debt unwinding of companies like Evergrande could spread in unpredictable ways. Real estate developers are sitting on $ 2.8 billion in loans. Real estate development and related industries underpin around 30% of GDP. Households have placed their savings in real estate in part because other assets offer a low return. Household spending on unfinished real estate represents half of the financing of developers. Local governments, especially outside major cities, depend on land sales and real estate development to generate income.

Law enforcement also makes business more difficult and less rewarding. The party had created a regulatory and legal framework, but Xi is forcing big, top-down changes so quickly that the regulations began to seem arbitrary. Consider, for example, “tertiary redistribution,” in which shameful tech companies hand money over to the state in an attempt to redeem themselves.

Because booming success is dangerous, private companies will be more careful. State-owned enterprises and strategic industries, including “advanced technologies” such as semiconductors, could benefit, but not the entrepreneurs who have been the real source of China’s dynamism. One measure of anxiety is that foreigners, who are not blocked by capital controls, are paying 31% less than mainland investors for identical Chinese stocks. The gap has widened sharply since early 2020.

All of this threatens to undermine the Chinese economy. It was already grappling with declining returns on infrastructure investments and the effects of a shrinking workforce and growing number of elderly dependents. After 40 years of rapid expansion, most Chinese people are completely unfamiliar with the difficult choices that a sharp and sustained downturn will impose.

In politics, the danger is that Mr. Xi’s campaign will degenerate into a cult of personality. To bring about change, he seized more power than any leader since Mao Zedong. As he prepares to break protocol at the 20th Communist Party Congress next year by claiming a third five-year presidential term, he is using the campaign to organize huge staff turnover, as the basis for a ideological repression and as the reason why he must stay at the helm. Each of them contains dangers.

One is that it is lacking in bureaucracy. Xi wants him to be responsive to market signals, but with promotions and purges in the air, Chinese officials are nervous. One of the causes of power cuts in some 20 provinces in recent weeks has been panic among bureaucrats who suddenly realized they risked missing their carbon reduction targets. Likewise, however, officials fearful of being accused of corruption or ideological deviance by their rivals tend to sit idly by. Failure is dangerous for a bureaucrat who takes the initiative; success too.

Another danger comes from ideological repression. “Moral Review Boards” and “Moral Clinics” enforce orthodox behavior using public shame. Although there is as yet no prospect of something as dreadful as the Cultural Revolution, the Chinese are less and less free to think and speak. In addition to promoting his own doctrines, Xi highlighted red nostalgia and made Maoism a vital step in building a new China, broadening his support ahead of the party congress.

Finally, the policy of Mr. Xi himself. In the long run, if he clings to power, the succession could prove very unstable. In the short term, if his attempt to impose a new reality doesn’t go as planned, he will face a fateful choice to either double down or step back. So far, repression seems more likely than compromise.

Western governments are also grappling with tech companies, inequality, and national security. In America, Congress rose to the challenge by considering a default on the national debt. Some may envy Mr. Xi’s ability to get things done quickly. But to imagine that he has the correct answers would be a big mistake.

This article appeared in the Leaders section of the print edition under the headline “The New China Reality”


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